De-risk your business  : Sustainability during tough times

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Rushin H Vadhani

AGM-Marketing

AYM Syntex Ltd;Mumbai

Entrepreneurship is all about risk. But research has shown that most successful entrepreneurs are masters at analyzing and minimizing/avoiding risk. Just like investors, they view entrepreneurship not as a business of taking risks, but as one of mitigating and minimizing risk.It not only focuses on the upside of your enterprise, but builds in security to limit the downside.


Textile 
and leather, which are labour-intensive industries, are facing the heat of centre’s decision to demonetise the Rs 500 and Rs 1,000 currencies. Companies are not able to pay wages to workers and not able to procure raw materials.While agreeing that the centre’s move will stream line the system, it will increase the cost of doing business.

 

Of the around six lakh workers, 40-50 per cent are migrants. Many of these workers don’t have bank accounts. These workers usually get paid an amount of around Rs 300-400 a day.

 

The challenge is to pay regular wages to the labour & other resources which are cash intensive.

Due to withdrawal limits & availability of cash with Banks , entrepreneurs are finding tough to run their businesses. Many entrepreneurs are at risk of huge loss in business or even closing their business due to limited resources.

This calls for innovation of business model to derisk. Businesses often find it harder to determine what changes to the model will work than whether a new product or technology will catch on.Less well understood is that these value drivers are themselves affected by sharp changes in, for example, demand and supply. In thinking through changes to the business model, therefore, it is essential to examine the major sources of risk to the model and how the model will handle them.

Thinking in these terms quickly demonstrates the potential for companies to create value by redesigning their business models to reduce their risks. It can also reveal unsuspected opportunities for creating value by adding risk—if the company is well-placed to manage it.

Lower Business Risks :

Often companies that have lowered their business model risk have done so by delaying production commitments, transferring risk to other parties, or improving the quality of their information.

Controlled speed of Production & SCM Innovation :

Speeding up the production process is the most obvious way to do this. It usually means producing in higher-cost locations, which goes against supply chain orthodoxy. But surprisingly often the gains from reducing demand uncertainty outweigh the added costs. This approach lies behind some very remarkable innovations.

Consider the famous Spanish clothing retailer Zara. Branded clothing companies have traditionally focused on managing costs by organizing their sourcing, production, and distribution as efficiently as possible. As a result, they may need as long as 12 to 18 months to design, produce, and deliver a new line of clothing. That means they have to make big bets on future consumer preferences and demand. Bearing this risk has consequences for the bottom line through inventory write-downs (if the clothes don’t sell) or for the top line through stock-outs (if people want more than you’ve made).

Zara reduced the likelihood of these consequences by designing a hyperfast supply chain that turns a new line around in two to four weeks—making it much easier to keep pace with consumer preferences. Of course, there is a price: The company makes most of its products in an expensive location (southern Europe), ships them to stores often (weekly), and uses an expensive mode of transportation (air). But Zara’s success demonstrates clearly that a focus on managing demand risks can trump a focus on costs.

Note that Zara did not discover anything new about the risks involved in retailing apparel. Everyone knows that customers are fickle and hard to read. Zara’s insight was simply that a faster cycle time meant that decisions about product specifications and quantities needn’t be made so far in advance, and fresher data would be available when the company did have to make commitments.

Reducing cycle time allows some companies to completely eliminate risks arising from demand uncertainty.

Review  Business Contracts :

Another way to manage risk—especially asset-related risk—is to pass the exposure on to someone else. This usually involves altering your contracts with the other stakeholders in your value chain: employees, suppliers, and customers.

In the late 1990s Blockbuster handed off risk to suppliers: It revolutionized the highly competitive video rental industry by shifting away from fixed-price contracts (under which each VHS tape cost Blockbuster $60) and toward revenue sharing with the major movie studios. Under the old arrangement, the studios took little risk in terms of a mismatch between demand and supply: They received $60 for a tape no matter how many times it was rented. Blockbuster assumed all the risk of acquiring a dud and had to hedge its bets by buying fewer tapes.

Under the new arrangement, Blockbuster paid only $5 to $10 up front but shared about 50% of its revenues with the studios. This changed the studios’ information sharing, pricing, and marketing incentives, with the result that Blockbuster could stock more tapes, increasing the availability of hit movies. The company’s market share rose from 25% to 38%, and profits for the industry grew by up to 20%.

Data is King :

Sometimes it isn’t possible to radically shorten the production process or alter your relationship with other stakeholders in your value chain. In that case, you can improve the quality of the information on which you base your commitments.

Even when companies can reduce risk using the classic approaches, they should consider upgrading their information-gathering capabilities, because speeding up production or rewriting contracts often creates a new risk. Because its employees work from home and are independent contractors, it is much harder to verify that they are appropriately trained to answer calls.

 

Add Risk to Derisk in future :

Many people regard risk only as something to eliminate—an undesirable commitment  of managing the resources and capabilities needed to deliver a product or service. But as the economist Robert Merton has often pointed out, one can also argue that companies create value by being better at managing risk than their competitors are. The implication is that if you are better than others at managing a particular risk, you should take on more of that risk.

The history of innovation demonstrates that quite a few companies have made money by taking on more risk—typically by changing the terms of their contracts with suppliers or customers. Sometimes trying to avoid a risk actually increases it, and you can better manage it by being willing to own more of it.

Advantages and Challenges

The risk-driven innovation we describe has one important advantage over other forms of innovation: It’s much cheaper. Innovating products and technologies often involves generating a lot of ideas and then trimming the list down through discussion, voting, and prototyping. Multiple iterations of prototypes, customer feedback, and experimentation are necessary. Significant R&D expenditures are often involved.Risk-driven innovation, however, can be approached in a systematic way and with few expenditures, and relatively clear and credible estimates can be made of the potential benefits and costs.

You might think that such innovations aren’t a sustainable form of competitive advantage. But experience shows that they actually can be, because copying someone else’s business model innovation often involves changing processes that are embedded in the culture of an organization—and substantially changing the cultural DNA is harder than adopting a new technology or design or entering a new market.

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  • *Disclaimer: The views and opinions expressed in this article are those of the author in his personal capacity of knowledge & perspectives on the mentioned subject